Well, we all knew this was coming—I mean, the people running around like crazies screaming about hyperinflation and what you need to do to protect yourself. Usually, it means that you need to buy gold, silver, Bitcoin, or some other thing that will “protect you” from the inflation boogeyman. Please stop, take a deep breath, and relax for a while.
For the record, many people think that hyperinflation is just a much higher amount of inflation. Actually, hyperinflation happens when a currency collapses, much like what happened in Germany after World War I and several times in certain African and Latin American countries. I don’t think any rational person is suggesting a currency collapse is coming to the U.S.
I’m talking about recent inflation data. According to the U.S. Labor Department, the Consumer Price Index (CPI) surged 4.2 percent in April. It was the fastest year-over-year rate of change in more than 12 years.
You didn’t have to be an economist to see this was coming. We all knew it was coming. We all knew U.S. economic demand was rising faster than supply. We all knew about the U.S. economic stimulus plans, that there are serious problems limiting production, and that energy demands are soaring with people on the move once again.
We all knew or read that semiconductors were in extremely short supply. I recently learned that the average modern car can easily have more than 3,000 semiconductor chips in it. Many cars are in short supply because manufacturers can’t get enough chips.
We’ve all known about these things for months, but Wall Street economists were still caught off-guard, expecting just a 3.6 percent rise. Who would have thought that an economy, which was largely shut down last year due to government policies, couldn’t swing back to full production instantly when demand surged again? What a shock!
States are fully reopening and dropping COVID-19 restrictions faster than global supply lines can keep up—for now. But, this demand-side economic pressure will eventually relent as businesses and supply lines catch up. In other words, this bump in inflationary pressure is temporary, or “transitory,” as Federal Reserve members like to say. This may be one of those few times when I agree with the Federal Reserve. To put it another way: “This, too, shall pass.”
Of course, the logical question here is, “What if it doesn’t?” The mainstream media keeps telling us everyone is worried about sustained sky-high inflation. Let me ask you this: If the economy is truly recovering, why is everyone worried about long-term inflation? Is it because of government stimulus and unemployment benefits? Those will only last so long, and there’s no way another round is going to pass Congress. In my ever-so-humble opinion, another round of stimulus is not coming.
Is it because of limited material supplies? The only way shortages will last is if businesses themselves don’t rise to meet demand. Yet, we already know they’re rising to the occasion; although, some are doing it cautiously due to lingering COVID-19 fears.
All things being equal, we’re seeing exactly what the Federal Reserve says we’re seeing: “a transitory bump in inflationary pressures exacerbated by extremely poor year-over-year comparisons.”
Here’s one way of looking at the numbers. If you have “nothing” and get just one of “something,” that’s a 100 percent increase. Economic growth in 2020 was basically nonexistent, so any growth this year will look massive.
If we’re truly in an economic recovery and if COVID-19 is no longer the elephant in the room, then we have nothing to worry about. Supply will eventually catch up with demand, and everything will even out. Inflation concerns will evaporate, and you’ll be rewarded for staying strong in your investments. This is basic economics 101.
On the other hand, if we’re not in true economic recovery, and this growth is all smoke and mirrors fueled by premature re-openings and massive stimulus spending, then inflation won’t be a concern there either. Demand will decline as re-openings are reversed, and stimulus will dry up, taking inflation and economic growth down with it. I doubt we’ll see that scenario.
In fact, the only way we’d see the sustained long-term inflation that Wall Street is supposedly worried about is if economic growth continues at its breakneck pace and businesses (for whatever reason) don’t invest enough in supply lines and materials to keep pace with demand (or if they don’t secure their companies from ransomware attacks). How likely do you think that is?
I hate to say it, but I’m siding with the reserve on this one. This is not the time to panic.
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About Nick Massey
Nick Massey is President of Massey Financial Services in Edmond, Oklahoma. Nick can be reached at www.nickmassey.com. Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment advisor.